Key Market – Indonesia

High diesel prices, reduction in subsidies for diesel and an 11% share of electricity generation coming from oil/diesel presents a good opportunity for LPG Power Generation to displace this.

Growing electricity demand and plans to incentivise and accelerate deployment of generation capacity could support LPG Power Generation deployment in the near term.

Expansion of the natural gas grid will make it tough for LPG Power Generation in the long term.

Below, we discuss the key factors that influence the outlook for LPG Power Generation in Indonesia in more detail.

Energy prices – High diesel prices with weakening policy support for diesel presents a good opportunity for LPG

A high share of coal in the power generation mix (over 50%) results in low electricity prices of ~US$0.09/kWh (illustrated in Figure 16) in Indonesia currently. Competing with this will be difficult for LPG today, but where power generation is fuelled by diesel (expensive and currently used in ~5,000 gensets across the country) and heavy fuel oil (commonly used

at industrial sites), LPG presents a more economically attractive option.

Ambitions to expand the natural gas network in Indonesia will likely increase the share of natural gas used for power generation in the longer term, reducing the opportunity for LPG. Yet, natural gas is currently priced at ~US$0.18/kWh for industrial consumers (double that of electricity), which could provide an opportunity for LPG Power Generation.

Global oil prices are gradually re-bounding, and if they rise significantly, the government will have to choose between the unpopularity of local electricity price hikes, or the budgetary risk of re-introducing energy subsidies. We anticipate a middle-ground, whereby electricity prices will likely increase (1 – 2%/yr), modest price rises in the period to 2020.

Electricity & natural gas grid infrastructure – A short term opportunity to support electrification and meeting a growing electricity demand, but likely to be displaced by natural gas / renewable sources in the medium term.

With around 11% of electricity generation from oil (illustrated in Figure 17 below), there is a good opportunity for LPG to displace, or compete with, these generation plants with less carbon intensive options. A strong drive from Government to extend the natural gas grid could result in this window of opportunity being limited, but natural gas will likely be targeted at displacing coal fired generation first – which accounts for over 50% of electricity generation.

A growing economy and growing energy demands put further stress on an already weak electricity grid which currently covers ~80% of the country (illustrated in Figure 17). The Indonesian archipelago currently suffers from lengthy blackouts – spurring the need for distributed power. The Government of Indonesia (GoI) estimates that electricity demand will likely rise by 5-8% p.a. to 2020, resulting in additional power generation (potentially in remote areas) and extension of the electricity grid will be required.

Currently, there are Government plans to improve the natural gas grid and increase gas supplies, as illustrated in Figure 18 below, with 50% of all gas produced to be used locally. The main gas demand centres – Sumatra and Java – are experiencing gas supply deficits, which could take over ten years to rectify.

The GoI policy focus is on energy supply security, which involves incentivising power plant construction (but no policy focused on LPG) and the use of local resources. Combined with the likely reduction in subsides for diesel, this could make LPG Power Generation an attractive option.

Current LPG activities & deployment – Lots of players active with growth in LPG use and infrastructure planned

Indonesia is the 4th biggest LPG importer in Asia (after China, Japan and India). In 2016, 6.67 million metric tons were used in the country, with the majority (~70%) imported. Annual LPG use is projected to increase by 5.7% per year up to 2019 – for use in power generation, cooking and other applications.

The state-owned oil and gas firm, Pertimina, plans to build new – and upgrade existing – LPG storage terminals to better manage growing imports over the next five years. This includes building two inland LPG storage terminals in East and West Java, upgrading the storage capacity of a terminal near Jakarta, and utilising terminals to help distribute LPG to the outer islands.

Several global engine manufacturers are active in Indonesia (illustrated below). Many of these have LPG offerings in their global portfolios, including Wärtsilä and GE. Wärtsilä also have multiple LPG plants in Indonesia, including the 190 MWe PLN Arun plant in Aceh and the 160 MWe Pltmg Bangkanai plant in Lahai district.

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